Financial distress in organizations can be considered as an extremely versatile and complex process. The heterogeneous nature of financial distress had been originated with diversified sources across financial constraints. As per the theory of finance, these constraints can be caused due to endogenous and exogenous factors of constrain. The endogenous factors of constraints are known as the internal issues across the organizations. Therefore, there is a negative impact only on specific companies operating in the same network. The exogenous factors of risk are known to be pervasive by nature, affecting each and every business organization across the market. One of the most significant financial constrain is changes taking place in the characteristics of the firm. Organizations that are smaller and younger may be facing more trouble to obtain financing and hence, cash may be held for the facilitation of operations. There might either be a passive or an active relationship between dividends and cash holding, organizations that do not make payment of dividends for accumulation of cash, or organizations may take the decision of paying dividends in the accumulation of cash.
The declined propensity for payment of dividends is likely because of two changes in tax decreasing favorable condition by dividend investors. The propensity of organizations for payment of dividends may start increasing again, due to increased number of organization turning as income trusts. A voluminous literature in corporate finance and macroeconomics has studied in depth the impact of financial constraints on firm value, capital investment, and business cycles. In pricing of asset, a significant doubt lies in how constraints of finance end up impacting expected returns and risk. However, Wu and Whites (2006) utilize an alternate index and identified that a number of distressed organizations end up earning higher level of average returns in comparison with less distressed organization, even though there is an underlying insignificance of difference. In an intuitive sense, the risk of organizations end up increasing with the level of their inflexibility while capital investment is adjusted for mitigating the effect of aggregate shocks over the streams of dividend.